Hernandez v. Commissioner
| Decision Date | 05 February 1998 |
| Docket Number | Docket No. 17244-96. |
| Citation | 75 T.C.M. 1714 |
| Parties | John R. Hernandez v. Commissioner. |
| Court | U.S. Tax Court |
John R. Hernandez, pro se. Charles Baer, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined the following deficiencies and accuracy-related penalties in petitioner's Federal income tax:
Accuracy-Related Penalty
Year Deficiency Sec. 6662
1990 ......... $ 7,680 $1,536
1991 ......... 7,139 1,428
1992 ......... 12,209 2,442
The issues for decision in this case are: (1) Whether the statutory notice of deficiency was issued within the period of limitations; (2) whether respondent is estopped from issuing the notice; (3) whether interest income from the redemption of tax certificates issued by Pasco County, Florida, is excluded from gross income under section 103;1 (4) the extent to which receipts from the redemption of the tax certificates are attributable to petitioner; and (5) whether petitioner is liable for accuracy-related penalties under section 6662(d) for substantial understatements of income tax. We sustain respondent's determinations in all respects.
The parties stipulated some of the facts, which, with the corresponding exhibits, are so found and incorporated herein by reference. Petitioner resided in Saint Leo, Florida, at all times relevant to this case.
During the tax years at issue, petitioner was a certified public accountant who was the business manager of an S corporation and operated an accounting service that prepared tax returns for others. Petitioner and Oneta Hernandez (Mrs. Hernandez)' had two daughters, Deborah H. Craig (Mrs. Craig) and Theresa Collins (Mrs. Collins).2 Mrs. Hernandez died prior to respondent's issuance of the statutory notice of deficiency.3
For several years, petitioner purchased at public auction tax certificates sold by Pasco County pursuant to Fla. Stat. Ann. sec. 197.432 (West 1989 & Supp. 1997). Pasco County and other counties in Florida sold certificates for amounts equal to delinquent property taxes, interest accrued thereon, and other costs and charges owed by property owners to the county. The certificates serve as a means by which the counties fund current government expenditures by transferring the indebtedness incurred by property owners for their property tax delinquencies to the purchasers of the tax certificates. They also provide a mechanism for eventual collection of the delinquent taxes out of the property against which the assessment was made, either through redemption of the certificates or eventual sale of the property. Potential purchasers bid at auction to purchase tax certificates in terms of the rate of interest payable on the face amount of the certificate up to a statutory maximum of 18 percent, with the certificate being sold to the party bidding the lowest rate.4
The sale of a certificate creates a tax lien in favor of the certificate holder that is superior to all other liens.5 Florida law allows property owners or other persons to redeem tax certificates and extinguish the tax liens created thereby by payment to the tax collector of the face amount of the certificate and interest accrued thereon at the rate bid from the date of sale of the tax certificate until the date of redemption.6 The county tax collector pays the amount received, less service charges, to the certificate holder, who then surrenders the certificate.
Petitioner purchased tax certificates with his own funds and with borrowed funds.7 Although the Pasco County tax collector issued the certificates purchased by petitioner in several combinations of names, they all listed either petitioner or Mrs. Hernandez as one of the coholders. For each certificate redeemed, the tax collector issued checks made out to the same persons listed as certificate holders. Some certificates were issued to Mrs. Hernandez "et al." Other certificates were issued to Mrs. Hernandez and one or more other persons who were listed on the certificates as alternate holders. Some certificates were issued to petitioner and one or more alternate holders. The rest of the certificates were issued to petitioner and Mrs. Hernandez as coholders.8
Each time one of the certificates at issue was redeemed, the tax collector paid an amount by check that included both the principal and interest accrued at the rate bid for the purchase of the certificate to the persons listed as coholders of that certificate. In each tax year at issue, the tax collector issued Forms 1099 showing the amount of interest paid on the redeemed certificates and the names of the persons listed as payees:
Names on Checks and Forms 1099 1990 1991 1992
O. Hernandez et al. ............................................. $23,983.93 -- --
D. or T. Collins or J.R. Hernandez .............................. 445.091 -- --
Mark Craig or J.R. Hernandez .................................... 5,666.40 $12,727.23 $10,467.89
V.H. Hernandez or M.L. Hernandez or J.R. Hernandez .............. 1,911.16 758.26 1,070.182
D.H. Craig or O. Hernandez, or J.R. Hernandez ................... -- 4,713.06 974.56
O. Hernandez or T.H. Coleman .................................... -- 6,183.88 20,353.64
O. Hernandez or J.R. Hernandez .................................. -- 8,256.03 22,420.97
Eric B. Craig or O. Hernandez ................................... -- -- 2,318.06
T. Coleman or J. Hernandez ...................................... -- 330.531 28.022
F.E. Reaves or O. Hernandez ..................................... 795.82 -- 525.91
J. Campbell or J. Hernandez ..................................... 737.501 -- 7,139.703
O. Hernandez, Trustee ........................................... -- -- 96.11
Nicole E. Craig or O. Hernandez ................................. -- -- 2,462.39
__________ _________ __________
Total interest ................................................ 33,539.90 32,968.99 67,857.43
Amount not included in income by respondent ................... (1,182.59) (330.53) (4,668.05)
---------- --------- ----------
Interest income adjustment on statutory notice
of deficiency (rounded) ....................................... 32,357.00 32,638.00 63,189.00
Interest income reported by petitioner
as tax-exempt interest income on line 8b of Form 10404 ........ 23,984.00 14,440.00 42,871.00
1 Amount not included in respondent's adjustment to income in statutory notice of deficiency because it was reported on
an income tax return by another person as either income or as tax-exempt income under sec. 103
2 Amount not included in statutory notice of deficiency. The record does not reveal whether respondent attributed all or
part of this amount to another taxpayer
3 Only half of this amount ($3,569.85) was included in respondent's adjustment to income in statutory notice of deficiency
because J. Campbell reported other half as income
4 Sec. 6012(d) requires that taxpayers report all interest received or accrued that is exempt from the tax imposed by ch. 1
"T. Collins" was petitioner's daughter, Mrs. Collins. "D. Collins" was petitioner's granddaughter, Mrs. Collins' daughter. Mrs. Collins was also listed as an alternate payee under the name "T.H. Coleman". Mrs. Collins reported $445.09 of interest on her income tax return for tax year 1990 and $330.53 on her income tax return for tax year 1991 as either income or tax-exempt interest.
"D.H. Craig" was Mrs. Craig, petitioner's other daughter. "Mark Craig" was petitioner's grandson. Mrs. Craig was his mother. Mark Craig did not report any interest from amounts received in redemption of tax certificates on income tax returns during those years. In a letter response to an inquiry by respondent's counsel, Mrs. Craig stated that petitioner was acting as her agent in holding the amounts of $4,713.06 for 1991 and $974.56 for 1992 of her income. However, Mrs. Craig did not disclose those amounts on her income tax returns for either year as either income or tax-exempt interest, nor does the record show that petitioner held such amounts in trust or that he paid taxes on those amounts as trustee.
Mrs. Craig had two other children who were listed as "Eric B. Craig" and "Nicole E. Craig" as alternate payees of interest received in redemption of tax certificates. Neither child filed an income tax return reporting any portion of such interest, nor did any other individual report any such amount on any of his income tax returns as either income or tax-exempt interest.
"V.H. Hernandez" and "M.L. Hernandez" were petitioner's brother, Vincent, and his brother's wife, Mildred, respectively. For tax year 1992, respondent did not include $1,070.18 in adjustments to petitioner's income from interest received in redemption of tax certificates held by petitioner jointly with Vincent or Mildred Hernandez. With respect to amounts reported on Forms 1099 bearing their names and petitioner's name for tax years 1990 and 1991, neither Vincent nor Mildred Hernandez filed an income tax return that reported interest from the redemption of the tax certificates in question as either income or tax-exempt interest. Vincent and Mildred Hernandez signed a document dated February 27, 1984, that purported to appoint petitioner as "Attorney-in-fact" to "represent them before the Tax Collector * * * of Pasco County". This document had no expiration date.
"F.E. Reaves...
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